Management Accounting Report: Budgeting Process and Human Influence

This report examines the significance of budgeting practices in a business context, focusing on the behavioral aspects that influence the process. It begins by outlining the crucial role of budgeting in decision-making, planning, and control within an organization. The report then delves into the influence of human behavior, highlighting how employee commitment and leadership styles impact the success of budgeting implementation. Various budgeting approaches, such as top-down, bottom-up, and negotiated budgets, are discussed, along with their implications on employee participation and motivation. Furthermore, the report addresses issues like budgetary slack and the impact of human behavior on overall budgetary performance. The conclusion emphasizes the importance of aligning budgeting practices with organizational goals and fostering employee involvement for effective management accounting.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student:
Name of the University:
Author’s Note:

1
MANAGEMENT ACCOUNTING
Table of Contents
Introduction......................................................................................................................................2
Discussion....................................................................................................................................2
Budgets and Human Behaviour...................................................................................................4
Conclusion.......................................................................................................................................6
Reference.........................................................................................................................................7

2
MANAGEMENT ACCOUNTING
Introduction
The main purpose of the assessment is to analyze the importance of budgeting practices
in a business and the behavioral aspects which are associated with Budgeting practices in a
business. The assessment considers the business budgeting practices and the role it performs in a
business environment (Henttu-Aho 2016). The assessment analyzes the human influence of
budgeting practices in a business. It is to be noted that implementation and application of a
budgeting practice is only as successful to the extent that the employees are committed to the
ideals of the budgetary process and encourage behaviour that is in accordance with the entity’s
objectives.
Discussion
The role of budgeting process in a business is of significant importance as lot of major
decisions are taken by the management on the basis of the budgets which is prepared by the
business (Henttu-Aho and Järvinen 2013). In addition to this, budgeting is practice which also
contributes to different areas of the business and therefore nowadays most of the businesses
apply budgeting practices so that proper management of the activities can be done. Some of the
functions which can be recognized in case of budgeting practice are explained below in details:
 Budgets serves as a formalized plan which is formulated by the management and the
same acts as a guideline which need to be followed by every department in pursuance of
the goals of the business.
 Budgeting practices also act as a planning tool which can be used by the management for
effectively forecasting the future needs of the business and also estimating different
targets of the business as per the goals and objectives of the management.

3
MANAGEMENT ACCOUNTING
 The process of budgeting also helps the management of the company to effectively
control the operations of a business and take necessary steps towards supervising and
further improving the business process.
 In addition to this, the main advantage of applying budgeting process in a business is that
it helps in systematic allocation of resources of the business which makes it possible for
the business to reduce the costs associated with the business and also optimal utilization
of resources.
The budgeting process has gained more importance in the business environment due to
expansion of operations of most of the businesses and emphasis on cost control. The budgets are
closely related to the development and strategic planning. It is to be noted that the
implementation of the budget and success of the budget depends on the employees of the
business. Therefore, it can be said that the employees have an influence in proper
implementation of the budgeting process. In turn, it is also to be noted that budgets also provide
motivation to the employees and managers as the same provides them with a sense of direction
and makes it clear what are the core objectives of the business.
Budgets and Human Behaviour
In a business environment, different types of budgets are prepared by the management
such as material budgets, cash budgets, sales budgets and other kinds of budgets. Budgeting
process can be referred to a tool which is available to the management of the company for
effective planning and controlling the activities of the business. The process of budgeting is used
by most of the businesses in today’s environment as it helps in planning and also helps the
business in acquiring loans from banks. These budgets contain targets which need to be followed
by the employees so that the targets of the business are achieved. In a management hierarchy of a

4
MANAGEMENT ACCOUNTING
business, the role of top-level management in taking major decisions for the business and also on
the interpersonal relationship between each level of management (Bourmistrov and Kaarbøe
2013). The process of Budgeting helps in bringing about co-ordination among different
departments and also help in motivating the employees of the business so that efficiency in
operations can be maintained by the management.
The system for budgeting process needs to be selected in such a manner that maximum
benefits can be derived from the budgeting process. The three major approaches which are be
employed by the management in preparation of the master budget of the business are explained
below in details:
 Top-Down Budgeting Practice: This type of practice allows the management to follow
an autocratic style of leadership which all means that the top-level management takes all
the major decisions regarding budgeting targets, allocation of resources and time frame
for the activity. In such an approach the lower management has no say in formulation of
the budget but only has the duty of properly executing the budgeting targets which is set
by the top-level management.
 Bottom-up Budgeting Practice: This type of budgeting practice is also known as
participative budgets (Kuruppun et al. 2016). This type of budgets preparation follows
the democratic style of leadership and allows all the department to take part in the
planning process and formulation of budgeting targets.
 Negotiated Budgets: These types of budgets are prepared by the management of the
company following a mixed approach of autocratic and democratic styles (Ijbssnet.com.
2019). The negotiated style is preferred by most of the business as it also considers the

5
MANAGEMENT ACCOUNTING
opinion of the lower management and where necessary imposes a decision which is
taken by the management of the company.
Therefore, the implementation of budgeting practice depends on the leadership style which
is followed by the management and the motivational level of the employees of the business. It is
to be noted that success of the budget depends on the participation of the employees in
implementation of the budget (Cardoş 2014). The employees are also affected by the nature of
the job and the same also has an influence on the participation ratio of the employees. As per
studies, participation of the employee is more effective when the job is also difficult and the
participation ratio is also high. It has also been seen in studies that an imposed budget can also be
implemented if the job is easy but the same would be not the case when the job is difficult in
nature.
The is also a condition that proper analysis is to be conducted for setting the targets for the
budget. The level of participation and setting of targets by the management has an important
influence in the planning process which is undertaken by the management (Broberg et al. 2017).
It is expected from the employees that they participate in the activities which are set in the
budget. In order to achieve such an aspect, the top-level management needs to maintain
supportive and co-operative relationship with the employees of the business (Langevin and
Mendoza 2013). One the changes which is adopted by most of the companies is the punishment
or reward system which is associated with the budgeting activities of the business. However, due
to such practices the employee might behave in a dysfunctional behaviour and try their best to
beat the policies which are established by the top-level management of the company.

6
MANAGEMENT ACCOUNTING
The approaches which is adopted by the management of the company plays a vital role in
whether the budget is successfully implemented or not. The participation of employees of the
business is an important factor and the management of the company needs to take all the
necessary steps for ensuring that the targets of the business can be achieved. Another issue which
affects the budgeting process is the practice of padding which is done by the senior management.
The practice involves either inflating the budgeting costs or underestimating the revenue of the
business which is estimated in the budget which is done in order to make the targets easy. This
the main reason due to which budgetary slacks takes place. This also affects the budgeting
process and thereby affects the performance of the business. In other words, the business is not
able to perform to its fullest potential.
The effects of human behaviour therefore are immense on budgeting system and the
management needs to take appropriate steps so that budgeting process is not affected in any
manner. The budgets should be prepared in such a manner that proper participation is required
from the employees. In addition to this participatory approach needs to be adopted by the
management.
Conclusion
The above discussion effectively shows that the management of the company has an
important role in implementation of budgeting practice in a business. The discussion above
shows that human behavior has an important influence on the process of budgeting. It can be said
that the management needs to incorporate proper policies so that the management is able to
implement targets which can be achieved by the employees of the business.

7
MANAGEMENT ACCOUNTING
Reference
Bourmistrov, A. and Kaarbøe, K., 2013. From comfort to stretch zones: A field study of two
multinational companies applying “beyond budgeting” ideas. Management accounting
research, 24(3), pp.196-211.
Broberg, P., Tagesson, T., Argento, D., Gyllengahm, N. and Mårtensson, O., 2017. Explaining
the influence of time budget pressure on audit quality in Sweden. Journal of Management &
Governance, 21(2), pp.331-350.
Cardoş, I.R., 2014. New trends in budgeting–a literature review. SEA–Practical Application of
Science, 2(04), pp.483-489.
Henttu-Aho, T. and Järvinen, J., 2013. A field study of the emerging practice of beyond
budgeting in industrial companies: an institutional perspective. European Accounting
Review, 22(4), pp.765-785.
Henttu-Aho, T., 2016. Enabling characteristics of new budgeting practice and the role of
controller. Qualitative Research in Accounting & Management, 13(1), pp.31-56.
Ijbssnet.com. (2019). [online] Available at:
http://ijbssnet.com/journals/Vol_3_No_14_Special_Issue_July_2012/12.pdf [Accessed 25 Apr.
2019].
Kuruppu, C., Adhikari, P., Gunarathna, V., Ambalangodage, D., Perera, P. and Karunarathna, C.,
2016. Participatory budgeting in a Sri Lankan urban council: A practice of power and
domination. Critical Perspectives on Accounting, 41, pp.1-17.

8
MANAGEMENT ACCOUNTING
Langevin, P. and Mendoza, C., 2013. How can management control system fairness reduce
managers’ unethical behaviours?. European Management Journal, 31(3), pp.209-222.